How do I properly apply a vendor credit as a payment to that vedors customer account when they are both a customer and vendor?

Welcome and thanks for posting in the Community, @Urson.

Based on that information, you can consider setting up a Barter account in QuickBooks Desktop (QBDT). Then, create Journal Entry (JE) to move the credit from the vendor to the customer.

To create a Barter account, refer to these steps:

1. In QBDT, go to the Lists menu at the top to get to the Chart of Accounts. 
2. Tick the Account drop-down at the bottom and pick New. 
3. Choose Bank, then Continue. 
4. Type Barter in the Account Name then hit Save & Close.

Once done, make a JE to move the credit to the Barter account. Then, create another one to transfer it from the Barter account to the customer. Before doing so, I recommend consulting an accountant on what specific accounts to use recording the transaction to ensure the accuracy of your books. 

Just in case, I'll add these articles for further guidance:

• Set up the barter bank account.
• Transfer and apply credit from one vendor to another in QuickBooks Desktop.

Reach out to me in the comment section below if you have any other questions or concerns. I'm always here to answer them. Have a wonderful rest of the day!